ITAR End-Use Investigations Reveal Compliance Priorities

As many exporters know, the U.S. government conducts investigations under the so-called “Blue Lantern” program to monitor end-use compliance in defense trade exports. On October 23, 2012, the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”) updated its Fiscal Year 2009 Blue Lantern report (titled “End-Use Monitoring report for Defense Articles and Defense Services”), describing actions it took to implement the “Blue Lantern” end-use monitoring program in 2009. While the data contained in the 2009 report are somewhat dated, the fiscal year 2010 and 2011 reports are also available. Together, the reports provide important reminders about monitoring compliance under the International Traffic in Arms Regulations (“ITAR”) for any company dealing with military related exports.The Blue Lantern program is managed by DDTC’s Office of Defense Trade Controls Compliance (“DTCC”). Under the program, which was initiated in 1990, DTCC conducts reviews to verify the legitimacy of certain defense trade transactions. The review typically compares case details against established criteria, including unusual routing or overseas destinations with a history of weak export controls. The reviews are designed to identify red flags that indicate a heightened risk of diversion or fraud. In cases where the Blue Lantern findings are inconsistent with information contained in the application or license, the case is given an unfavorable determination and referred to DTCC’s Enforcement Division for potential civil or criminal enforcement.

The Blue Lantern reports provide useful statistics on investigations by region, commodity type, and favorable versus unfavorable resolution. Each report also contains a description of the leading reasons for unfavorable determinations. While the reasons for unfavorable reviews vary from year to year, they provide a valuable snapshot of enforcement priorities. DDTC stresses in the reports that Blue Lantern reviews are not random, but are selected to identify transactions most at risk for diversion or misuse, so those areas where unfavorable determinations were most common can be seen to be the areas where companies’ practices have most diverged from DTCC’s own expectations for compliance.

For this reason, it is noteworthy that the most common reasons for unfavorable Blue Lantern reviews for 2009 to 2011 stayed relatively stable. Throughout that time period, “derogatory information/foreign party deemed unreliable” was either the first or second most common reason for unfavorable review for each year. Unfavorable determinations in that category may arise from various facts identified about the end users, including criminal records, adverse intelligence information, or other negative information.

For companies involved in ITAR exports, the prevalence of “unreliable” foreign parties in Blue Lantern cases underlines the importance of conducting sufficient diligence of an end-user’s operations to spot issues before they are identified by the government.

Blue Lantern reviews also address compliance issues beyond unreliable end users. For example, the 2009 Report reviewed nearly 35,000 instances of the use of the Canada exemption under the ITAR during a two year period. Although its review was largely positive, DTCC found 154 examples where the Automated Export System records cited the Canadian Exemption, but at the same time listed countries other than Canada as the ultimate destination.

Finally, one series of findings in the 2011 Report indicates exporters should exercise particular care in identifying foreign parties involved in export transactions. The Report notes a rise in unfavorable Blue Lantern determinations in that year involving “unauthorized foreign parties.” Several cases appeared to result from administrative oversight (e.g., where the applicant inadvertently failed to identify all the foreign parties in the license application) rather than deliberate attempts to hide the existence of a party. Nevertheless, these findings show how broad Blue Lantern reviews are, and indicate how important it is to have an effective ITAR compliance program.

Although DDTC only conducts Blue Lantern reviews of a small percentage of ITAR exports each year, the program provides a constant reminder of factors for exporters to consider in reviewing their own ITAR compliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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